Exit and Growth Strategies for Middle Market Businesses

For the past 4 years most business owners and executive teams included acquisitions as part of their strategic plan, but a funny thing happened on the way to the forum – very few of these companies were able to cross this item off their to-do list. Setting aside the frenzy of the capital gains tax-incented divestitures in late 2012, there has been lethargy in the market since 2008. We have also seen a marked decrease in transaction volumes through the first half of 2013.

Why is that? There a few things that have got in the way of a robust period of corporate M&A. These include the obvious – a consistent climate of business uncertainty. No sooner does the world stop talking about the pending collapse of the Eurozone, than our eyes are refocused on the prospects of the US government shutting down all non-essential spending and dark clouds looming around the possibility of it also defaulting on its debt. Hardly the type of news to inspire confidence in the predictability of the future.

Playing into this is the usual cast of other characters – valuation gaps between a buyer’s idea of purchase price and the seller’s expectation of value, slow growth markets, shortage of attractive investment options for business sellers and no compelling sense of urgency.

But, as time moves on many mid-market owners have come to realize that they can only stay on the sidelines for so long. This applies to both buyers and sellers.

As we head into 2014, we are expecting an uptick in transaction volumes. Perhaps not in the mega-deals that everyone hears about, but definitely in the middle market –transactions that, for the most part, are under the radar. There are two dynamics driving this – because of the challenges of organic growth, executive teams are being pushed to hit corporate targets through intelligent acquisitions. While at the same time, aging business owners are looking forward to the day when they can step out of the business trenches and enjoy the rewards of a life-time of hard work.

With this as background, it might be helpful to talk about some of the important lessons we have learned about developing and executing a successful strategic acquisition plan.

Start your acquisition program with a hard look at your own business. Determine what your customers are asking for that you can’t deliver. Check out what your competitors are doing to set themselves apart from you. Ask yourself, what is required to take this company to the next level? Do you have significant capacity in certain operational areas? Do you have a core competency that can be leveraged? From this will emerge a picture of some of the key criteria of an ideal acquisition.

Keep in mind that just because a business is for sale doesn’t mean you should buy it. The absolute bedrock question that you must ask is “why.” We have found that if there is not a compelling answer to the question “Why are we doing this acquisition?” then you shouldn’t do it. If the benefits to your organization are not obvious, save your money and keep looking for something that really fits. Finding those ideal targets takes work and time. In those cases where completing a strategic acquisition is absolutely vital to a company, sophisticated strategic buyers will often hire an investment banker to find and contact acquisitions that fit the key criteria.

Seek out businesses that are not actively in a controlled auction sale process, you are likely to get a better strategic fit. We have found that many business owners who are not actively selling their business are open to a meaningful discussion with a well qualified, serious buyer where the transaction makes sense to them. In this type of situation, spend some time in advance preparing your presentation about your business. Just as you are assessing the seller’s business, the seller is also assessing your.

Just because something is a bargain, doesn’t make it a smart acquisition. The old adage that “quality is remembered long after the price is forgotten” rings especially true in corporate acquisitions. When you acquire a company you are making a long term investment, and price should never be the primary criteria to decide if an acquisition is sound.

The flip side of this is that paying a reasonable premium to acquire the perfect-fit operation is good business. When looking at the pricing of these rare opportunities remember the saying “extinct is forever.” Once someone else buys that business, you can’t – it is now “extinct.”

Develop in advance an assessment approach that reflects the fact that probably every target you look at will have had poor financial results during 2008 to 2011. Part of this assessment approach has to be a mind set that recognizes that the economy has gone through a major trauma and companies that have survived this acid test have demonstrated that their business model is robust and their customer base is real.

Learn to differentiate between price and structure. Price means what you will pay, structure means how you will pay it. Reasonable transaction structures can be used effectively to bridge valuation differences or deal with uncertain outcomes (e.g. new customers, outstanding bids, uncertain future earnings). When dealing with structure, complexity is not your friend – keep it simple and understandable.

Put a strong acquisition team in place before you start. Acquisitions are always time consuming and complicated. This team should include a senior member of your management team, a lawyer with extensive experience in acquisitions, your accountants and an investment banker. It might seem expensive, but in the end, it usually saves you time and money.

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